The IRS has updated its FAQ entitled “Coronavirus-related relief for retirement plans and IRAs questions and answers,”[1] adding two questions to assist employers who, facing staffing issues, rehire employees who had previously retired.

The two questions are added at the beginning of the FAQ in a new section titled “Rehires Following Bona Fide Retirement; In-Service Distributions.”  The first question looks at the impact of a rehire for a plan that does not allow for in-service distributions.  The concern is that by rehiring the employee, the original retirement may now be challenged by the IRS as not a bona-fide retirement.  The question indicates how this problem may be avoided.

The question reads:

Q1. A qualified pension plan that does not provide for in-service distributions commences benefit distributions to an individual who applies for retirement benefits and experiences a bona fide retirement. If the plan sponsor rehires the individual due to unforeseen hiring needs related to the COVID-19 pandemic, will the rehire cause that individual’s prior retirement to no longer be considered a bona fide retirement? (added 10/22/2021)[2]

The answer begins indicating this generally will not be an issue:

A1. Generally, no. Treasury regulations generally require a qualified pension plan to be maintained primarily to provide systematically for the payment of definitely determinable benefits over a period of years, usually for life, after retirement or attainment of normal retirement age. See Treas. Reg. § 1.401(a)-1(b)(1)(i). Accordingly, a plan that does not permit in-service distributions may commence benefit distributions to an individual only when the individual has a bona fide retirement. Although the determination of whether an individual’s retirement under a plan is bona fide is based on a facts and circumstances analysis (in the absence of plan terms specifying the conditions under which a retirement will be considered bona fide), a rehire due to unforeseen circumstances that do not reflect any prearrangement to rehire the individual will not cause the individual’s prior retirement to no longer be considered a bona fide retirement under the plan.[3]

The answer next provides an example of such an acceptable rehiring that is not considered part of a prearrangement:

For example, if a public school district sponsoring a qualified pension plan experiences a critical labor shortage due to the COVID-19 pandemic that was unforeseen at the time of an individual’s prior bona fide retirement, the public school district rehires the individual to help ease the labor shortage, and the plan terms do not define a bona fide retirement in a way that prevents the rehire, the individual’s reemployment would not cause the prior retirement to fail to be a bona fide retirement. Consequently, if plan terms permit, benefit distributions could continue after the rehire.[4]

But the answer notes that the plan will still need to look at the impact of plan provisions on this rehiring, since they will need to be respected:

In addition, if the sponsor of a qualified pension plan wishes to rehire a retired employee to fill an unforeseen hiring need related to the COVID-19 pandemic, the sponsor should analyze the impact of the rehire under the plan by taking into account any plan terms, including any need for plan amendments, relating to rehires. For example, plan sponsors should review any plan terms requiring that an individual who retires and commences benefit distributions not be rehired within a specified period, any plan terms relating to the suspension of distributions upon rehire, and any other plan terms that may have an impact on the pension benefit of a rehire.[5]

While this may seem to indicate there will be issues, the reality is that the IRS is not giving special relief, just recognizing that a staffing shortage is generally evidence there was no prearrangement to have the person return to work as a way to “workaround” the fact that the plan prohibits in-service distributions.

The FAQs also remind plan sponsors that a retirement plan can contain terms that allow for in-service distributions once the employee has attained age 59 ½ or the plan’s normal retirement age.  Such in-service distribution options might entice retirement age employees to continue working rather than retire (and thus need to be replaced) if a plan allows for the option.

The Q&A on this topic reads as follows:

Q2: May a qualified pension plan permit individuals who are working to commence in-service distributions? (added 10/22/2021)

A2: Yes. A qualified pension plan generally may allow individuals to commence in-service distributions if the individuals have attained either age 59½ or the plan’s normal retirement age. See Internal Revenue Code section 401(a)(36) (in-service distributions generally permitted at age 59½); final regulations on distributions from a pension plan upon attainment of normal retirement age (Treas. Reg. § 1.401(a)-1(b), TD 9325, 72 FR 28604); proposed regulations on the applicability of the normal retirement age regulations to governmental pension plans (Prop. Treas. Reg. § 1.401(a)-1(b)(2)(v), 81 FR 4599); and Section F of Notice 2020-68, 2020-38 IRB 567 (regarding recent changes to in-service distribution rules under § 401(a)(36). However, distributions commencing to an individual before age 59½ may be subject to a 10% additional tax under Internal Revenue Code section 72(t), unless the distributions fit within an exception to that tax (for a description of the exceptions to the 10% additional tax under section 72(t), see Retirement Topics - Exceptions to Tax on Early Distributions).

[1] “Coronavirus-related relief for retirement plans and IRAs questions and answers,” IRS website, October 22, 2021 update, https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers (retrieved October 23, 2021)

[2] “Coronavirus-related relief for retirement plans and IRAs questions and answers,” IRS website, October 22, 2021 update

[3] “Coronavirus-related relief for retirement plans and IRAs questions and answers,” IRS website, October 22, 2021 update

[4] “Coronavirus-related relief for retirement plans and IRAs questions and answers,” IRS website, October 22, 2021 update

[5] “Coronavirus-related relief for retirement plans and IRAs questions and answers,” IRS website, October 22, 2021 update